Market Commentary (11.18.09):

The major averages closed lower after a series of mixed economic data was released. Volume, a critical component of institutional demand, was higher than Tuesday’s levels which marked a distribution day for the Nasdaq but the losses were too small to constitute a distribution day for the NYSE. However, the fact that the major averages were down for most of the session and closed near their intra day highs helps offset that concern. There were 40 high-ranked companies from the CANSLIM.net Leaders List making a new 52-week high and appearing on the CANSLIM.net BreakOuts Page, the same number of issues that appeared on the prior session. In terms of new leadership, it was encouraging to see new 52-week highs outnumber new 52-week lows on the NYSE and Nasdaq exchange.

Economic Data:

The big economic news of the day was released before the market opened, at 8:30 am (EST). In Washington D.C., the Labor Department released a stronger-than-expected consumer price index (CPI) which ignited inflationary concerns. Headline CPI rose +0.3% which was higher than the Street’s forecast for a +0.2% gain.  Core CPI, which excludes food and energy, was unchanged from last month’s reading of a +0.2% gain. However, core prices also topped the Street’s estimate for a +0.1% gain and is the component of the report that the Federal Reserve tends to focus on. The uptick in consumer prices sparked concern that companies will have little room to raise prices this holiday season (which curbs earnings). The primary reason is that the consumer remains weak: unemployment is at a 26-year high of +10.2% and wages fell -5.2% in September from the same period last year. The Commerce Department released a separate report at 8:30am (EST) which showed that housing starts unexpectedly tanked last month. Housing starts (a.k.a registrations for new construction for residential housing units), slid -10.6% in October which was well below estimates. Permits for new construction slid -28.9% from the same period last year which led many to question the sustainability of the housing recovery.

Focus On Price & Volume, Not The Noise

Those of you who have read this commentary over the past 5 years know that we like to analyze the news but pay a lot more attention on how the market reacts to the news. That said, the market has reacted and continues to react rather well to the latest round of economic and earnings data. The vast majority of third quarter earnings are now behind us and the major averages remain perched just under fresh 2009 highs! Barring some unforeseen event, earnings were down for the average company in the S&P 500 for the ninth straight quarter but managed to exceed the average estimate which is one reason why the market’s have reacted rather well to earnings. That, coupled with the notion that the “worst is behind us” explains the market’s collective “take” on Q3 earnings. In addition, economic data, although not impressive, has improved markedly from this time last year which suggests the global government stimulus packages are working. The benchmark S&P 500 has surged a whopping +64% from its 12-year low in March as global GDP rebounded. The eight-month rally has pushed the index’s p/e ratio (i.e. valuation) to 22.3 which is the highest reading since 2002 according to Bloomberg.com. Our two primary concerns regarding this rally remains: the dearth of high quality leadership triggering technical buy signals & waning volume in recent weeks. Continue to focus on our two favorite sectors right now: large cap technology and gold as a good proxy for the market.